RetireMentors

Tax Planning

Tax planning for retirees takes several forms

Dan Moisand,
a Principal at Moisand Fitzgerald
Tamayo, LLC in Melbourne and Orlando, Fla., is one of the financial
planning profession’s most respected practitioners advising retirees and near
retirees. Dan’s thoughts can be found in bylined articles in most major
publications for financial planners and a slew of financial planning related
publications have featured him as one of America’s top advisors and was recently
named one of
"15
transformational advisers" by InvestmentNews. A past national
President of the Financial Planning Association (FPA), his service to the
profession includes three years on the CFP Board of Practice Standards crafting
the standards to which all US CFP’s must adhere and serving as Chairman of the
CFP Board’s Discipline and Ethics commission, the body that judges complaints
against CFP licensees. A frequent presenter at such events in the U.S., Dan has
spoken to planner groups on five continents and in recent years has led
delegations of U.S. planners to Russia and China on behalf of the FPA.

Taxes affect retirees in many ways, so both opportunities and pitfalls abound. This week's featured question touches on several angles from which retirees can approach tax planning.

Q.Mr. Moisand, We are a 67-year-old male and 65-year-old female couple, recently retired (forcibly, rather sudden) and thus wondering if our long savings situation is going to fly for retirement. We appear to need about $105,000 or more annually at least for the first stages of retirement. We have long-term care policies, access to a 3.5% heloc, and expect our freelance work will total a few thousand max, if that. Situation: Less than $125,000 in low-rate mortgage debt on a $1 million property, $180,000 cash, to be used first, $195,000 taxable (comparatively conservative investments), to be used second. $325,000 traditional IRAs (equity funds), to be used third and $1 million in Roth IRAs (equity fund), used last.

We intend to delay taking Social Security. Our total should hit $48,000 a year or more. I am inclined to do things myself, rightly or wrongly, and calculators indicate all looks okay. But I read articles about savvier tax timing/planning and what not. — D.M., Wayland Mass.

A. Whether you have done things rightly or wrongly, today, you sit in a good situation.

Tax savviness is an intriguing goal because the tax planning should be approached from several angles. The one you are emphasizing here is the order of withdrawals from various accounts. Many people advocate doing just as you described — first from taxable accounts, then deferred, then Roths.

The most common variation I see on this order involves taking the withdrawals from tax-deferred accounts like 401(k)s and traditional IRAs first. The motivation for this is the ability to have the distributions taxed at a low tax rate relative to the future expected tax rates.

For instance, based on what you shared, it looks like you would be able to distribute some funds from your IRA and have it taxed at a rate of 15% or less. If you are confident the tax rate applied to you later will be higher, you may wish to distribute some funds or convert them to a Roth IRA.

With multiple types of accounts, you can exercise additional tax planning by strategically selecting which accounts hold various asset classes. For instance, dividends paid by real estate investment trusts and many overseas companies aren't "qualified" dividends so they would be taxed at ordinary income-tax rates, not the lower capital gains rates. You may wish to put those holdings into the IRAs.

More planning can be done with the particular investments you choose within asset classes. Some investments are inherently more tax-efficient than others based on how they are run. To the extent one is in the 15% bracket, long-term capital gains are tax free so some people find advantage in harvesting gains in taxable accounts. If you are charitably inclined, a whole slew of other options are possibilities.

Q.Hi, My question relates to buying health insurance for my soon to be 62-year-old wife before she is eligible for Medicare. I am thinking that I will get her insurance through the Affordable Health Care Act but do not understand how they determine my premiums and my credits that I will get. Is it possible that I maybe should NOT take my Social Security this year and wait until her Insurance goes to Medicare. I would currently be able to handle our expenses without taking Social Security so could wait if it would be beneficial financially. What do you think? — B.H.

A. There are many reasons delaying Social Security can be smart. The ACA provides another one, for some. The subsidies are based on a scale that limits your premiums based on your income. If your Modified Adjusted Gross Income (MAGI) is less than 400% of the Federal Poverty Level FPL ($62,040 for a two person household) AND the premium for the benchmark plan in your exchange, the second-lowest cost Silver plan, is high enough, you may qualify for a subsidy that brings your net cost down to a cap.

If your Modified Adjusted Gross Income (MAGI) exceeds 400% of FPL, there would be no cap on your cost. Social Security is included in your MAGI so taking it could reduce or eliminate any subsidy. You will need to contact your exchange to see what the pricing is on the various plans you can buy.

Q.Hi Dan, Enjoy your column. I'm 61 and my wife is 59 and I'm unsure as to when/if we're both eligible to collect Social Security. If we're both qualified, then what's the ideal way for us to draw the most $'s given our ages (again she's 59 and I'm 61)? Thanks for your article! I appreciate the help! — K.M., Orange Park, FL

A. To qualify for retirement benefits, you need 40 quarters of qualifying work. In 1978, that meant $250 in wages in a quarter. In 2014, $4,800 gets you four quarters even if you earn the $4,800 in a single day. Each person qualifies on their own work record. However, a spouse that doesn't qualify on their own work record can still get spousal benefits off their spouse's record. The earliest one can claim retirement benefits is 62.

A good strategy depends on many variables but generally if either of you have an above average lifespan, you will collect more by at least delaying the claim of the person with the largest benefit as long as possible, up to age 70. You can request a benefit estimate from Social Security online to get the numbers you will need to attempt to figure this out.

Q.Dan, I read the story about one of your readers wanting to buy land with an IRA. I too have bought a home with one of my IRA's and my custodian tells me that it will be fine to leave it instead of taking the required distributions when I turn 59.5. Is this true? I shouldn't have to sell it to get the distributions right? IRS regulations are very strict with this. It does provide decent rent. I would appreciate a reply on this. — P.L.

A. Glad it's a rental because personal use is prohibited. Required Minimum Distributions aren't required until age 70 ½. If you have other IRAs, you can pay the RMD from one of those accounts. Otherwise, current tax law indicates, you may have a big problem at that time because distributions must be made.

Dan Moisand's comments are for informational purposes only and aren't a substitute for personalized advice. Consult your adviser about what is best for you.

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